External Diseconomies in Competitive Supply: Reply
The many comments stimulated by our recent paper call into question its concluding assertion that no real paradigm has existed in this area of the theory of competitive supply. Several critics allege that our conclusions as to the existence of production as well as exchange inefficiencies depend on a particular form of the firm's cost function. An alternative form, said to be more in keeping with the standard assumptions of competitive theory, is shown to restore the orthodox analysis in its pristine purity and simplicity, including its implications for the efficacy of Pigovian corrective taxes. While we concede that the critics' specification of the cost function does rescue the orthodox analysis, we dispute whether their formulation more nearly reflects the traditional behavioral assumptions of competitive theory. Indeed, while legitimate argument on the point may exist, we continue to feel that our own formulation embodies the traditional assumptions. In any event, we are unconvinced that the alternative premise should be favored simply because it restores the neatness of the Pigovian prescriptions. The real issue is which of the formulations more accurately captures the behavioral rule followed by competitive decision makers.
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